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Private equity firms spent a tenth of their cash mountain known as dry powder in the first half of this year, as deal activity rose.

The increased spend is seen as a positive sign for those planning to raise fresh cash. According to one fund of funds manager, for firms to get through their vast overhang of capital is a positive sign for future fundraising. He estimated that firms might spend nearly a third of all dry powder this year.

According to State Street, which tracks 1,859 firms with $1.6 trillion under management, dry powder - committed capital that has yet to be spent - was cut by $56bn, or 10% of the total, in the first six months of the year, The amount of dry powder continued to fall in the third quarter, State Street added.

Bill Pryor, senior vice president of State Street Investment Analytics, said: “In the first half of 2010, deal flow picked up significantly and drove down accumulated outstanding commitments by about 10% from its peak in the fourth quarter of 2009.”

Deal activity picked up as rising asset prices boosted firms' returns. Firms tracked by State Street posted an average internal rate of return – a measure of annual performance - of 0.65% in the second quarter, the fifth consecutive rise.

Pryor said: “We have now seen five consecutive quarters of positive returns for private equity with low volatility relative to the public equity markets.”

But the pace of growth in average internal rates of return slowed sharply from 2.2% in the first quarter and 5.5% in the second quarter last year, State Street said. That was largely due to poor performance in Europe, where firms returned -3.1% on average in the second quarter, compared with growth of 0.5% for the rest of the world.

However, firms reported an average 19.2% return between July 2009 and June this year. State Street said the best performing strategy was mezzanine and distressed debt, which returned 27.9% over the period.